Ugandan shilling weakens against the US Dollar, Tax hike Implicated

The Ugandan shilling weakened against the dollar on Friday, a day after the finance minister raised taxes on earnings from government securities in the 2012/13 fiscal year, unnerving offshore investors.

Traders forecast further losses ahead as more foreign investors head for the exit.

On Thursday, Maria Kiwanuka announced in her budget speech the government would hike withholding tax on income from investments in Treasury bonds and bills to 20 percent from 15 percent.

At 0739 GMT commercial banks in Kampala quoted the currency of east Africa's third largest economy at 2,505/2,515, weaker than Thursday's close of 2,495/2,505.

"The shilling came under pressure as soon as the measure was announced and we've seen the weakening continue," said Robert Nyehangane, head of treasury at Housing Finance Bank.

"The hike has certainly spooked foreign investors and these are the guys whose dollars keep the shilling supported."

Bank of Uganda (BoU) is due to auction Treasury bonds of 3 and 10 year tenors of 100 billion shillings each next week and traders say they are unlikely to draw much foreign interest in the wake of the tax hike.

Nyehangane said the shilling would remain under pressure but that the central bank was likely to intervene to cushion any sharp falls.

While cutting its key lending rate this month BoU vowed to intervene in the markets to keep the shilling from being undermined by the euro zone crisis.

BoU cut its benchmark Central Bank Rate for this month to 20 percent from 21 percent in May, citing a need to boost credit flow to the private sector and stimulate economic growth.

A trader at a leading commercial bank said the government's significant increase of public spending in the next financial year would also weaken the shilling in the medium term.

Uganda is due to spend 11.2 trillion shillings, a 16.7 percent increase over expenditure in the year ending on June 30.

"A large portion of this money will be funnelled into infrastructure investments," he said.

"And these take lots of imported raw materials so we anticipate an upswing in dollar demand when these investments commence and that isn't good news for the shilling."